Breaking Down the Federal Clean Energy Innovation Budget

This is Part 2 of a series of posts analyzing and detailing federal investments in clean energy innovation. Part 1, defining clean energy innovation, can be found here.

Clean energy innovation encompasses more than any one policy, whether it is R&D, tax incentives, regulation, or an economy-wide carbon price. Well-designed public investments impact the entire energy innovation ecosystem and fill gaps in next-generation technology development and deployment. Using data from the Energy Innovation Tracker, this post takes a top-line look at the United States’ portfolio of clean energy investments between 2009 and 2012.

The figure below details federal investments in energy innovation since FY2009, which are divided into ‘technology development’ and ‘technology deployment’ categories. In this case, technology development captures all investments in basic science, research and development, demonstration; technology deployment investments facilitate the installation and procurement of clean energy technologies in commercial markets, along with supporting investments in siting and permitting and training and education.

Figure: Total Clean Energy Innovation Investments

During the past four years, the balance between development and deployment has evolved dramatically, driven in part by increased procurement of emerging and commercial off-the-shelf energy technologies by the Department of Defense, as well as expanded deployment initiatives and tax incentives through the Department of Energy and the U.S. Treasury Department.

Between 2009 and 2011, investment in deployment and procurement of clean energy technologies nearly quadrupled, while investment in R&D and demonstration projects remained relatively steady or declined. All told, technology deployment and procurement now captures about 63.8 percent of the clean energy innovation budget, while technology development captures 36.1 percent.

Additionally, the impact of clean significant investments made through the American Recovery and Reinvestment Act (e.g. Stimulus) cannot be overstated. The Stimulus directly increased federal funding of research and demonstration projects through a series of new programs and initiatives, and also established many tax incentives for the adoption of energy efficiency and renewable energy technologies that were extended into FY2012. While some critics accuse the stimulus of coming up short in its effort to reverse the effects of the Great Recession on the American economy, the stimulus super-charged energy innovation with public investments in new programs, and created new opportunities for funding of advanced energy R&D through ARPA-E.

Figure: Total Clean Energy Innovation Investment by Innovation Stage

Distributing ARRA funds equally between FY2009 and FY2010 (the fiscal years during which most of the Recovery Act funds were distributed) suggests that total investment in clean energy has fallen by nearly $8 billion since FY2010 – a significant decline by any standard. But understanding the characteristics of the decline reveals troubling evidence of the stagnation of policy development at the federal level.

In real terms, funding for deployment incentives declined by over $6 billion, but as a percentage of total clean energy innovation investment, deployment incentives only declined slightly, from 66 percent of total funding to 59 percent between FY2010 and FY2012. In comparison, funding for demonstration projects was decimated over the same period, falling from 6 percent of total spending in FY2011 to just 0.2 percent in FY2012 (a 97 percent decrease). The figure below captures this comparison.

Figure: Total Clean Energy Investments FY2010 vs. FY2012

The significant decline of federal support for demonstration projects post-Stimulus is a symptom of the lack of dedicated U.S. technology demonstration policy – a weakness affecting the productivity of the country’s innovation ecosystem.

As previously argued (here and by the Breakthrough Institute here), demonstration projects are characteristically often very capital-intensive, but are the key to driving a technology from the research stage to market. First-of kind investments in emerging clean energy projects often serve as an educational exercise for technology producers, manufacturers, and consumers alike, consequently playing an integral role in the bridging of the commercialization valley of death that often limits development of (especially energy) technologies from finding a place in commercial markets alongside tough, heavily subsidized conventional energy.

In lieu of expiring Stimulus investments, the United States clean energy innovation ecosystem shows signs of being hollowed out. Strong industry focus sustains some deployment incentives like the Production Tax Credit, but overall investments continue to decline (say nothing for calls to reform these policies to focus more on innovation). Demonstration projects that prepare technologies for market acceptance and integration have been shouldered. And technology development investments, especially R&D investments, remain stagnate.

Ultimately, the current federal clean energy innovation budget is not only underfunded, but is also less diversified across innovations phases, potentially resulting in significant barriers to next-generation energy innovation.

Matthew Stepp is a Senior Analyst with the Information Technology and Innovation Foundation (ITIF) specializing in climate change and clean energy policy. His research interests include clean energy technology development, climate science policy development, transportation policy, and the role innovation has in economic growth.